What Does Indexed Life Insurance Mean?
An indexed life insurance policy is a life insurance policy with a cash accumulation component that is tied to the performance of various indexes. The policyholder chooses which index they would like to tie their cash accumulation component to (for example, the S&P 500).
Insuranceopedia Explains Indexed Life Insurance
For policyholders with indexed life insurance, part of the premium they pay goes to paying for the death benefit. The other part, however, is added to the cash accumulation component. The interest rate that is paid on the cash accumulation component for these policies is determined by the performance of the index tied to the policy. So, if the index goes up 5 percent, 5 percent interest can be applied to the policy.
One major benefit of these policies is that, if the stock market goes down and the index drops, then the policy simply does not receive any interest during this period. This is a far preferable alternative to having money removed when there is a negative move in the index.